THE LACLEDE GROUP, INC.

INTRODUCTION

This management's discussion analyzes the financial condition and results of operations of The Laclede Group, Inc. (Laclede Group or the Company) and its subsidiaries. It includes management's view of factors that affect its business, explanations of past financial results including changes in earnings and costs from the prior year periods, and their effects on the Company's overall financial condition and liquidity.

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's consolidated financial statements and the notes thereto.

RESULTS OF OPERATIONS

Overview

Laclede Group's earnings are primarily derived from the regulated activities of its largest subsidiary, Laclede Gas Company (Laclede Gas or the Utility), Missouri's largest natural gas distribution company. Laclede Gas is regulated by the Missouri Public Service Commission (MoPSC or Commission) and serves the City of St. Louis and parts of ten counties in eastern Missouri. Laclede Gas delivers natural gas to retail customers at rates and in accordance with tariffs authorized by the MoPSC. The Utility's earnings are primarily generated by the sale of heating energy. The Utility's weather mitigation rate design lessens the impact of weather volatility on Laclede Gas customers during cold winters and stabilizes the Utility's earnings by recovering fixed costs more evenly during the heating season. Due to the seasonal nature of the business of Laclede Gas, Laclede Group's earnings are seasonal in nature and are typically concentrated in the November through April period, which generally corresponds with the heating season.

On March 31, 2008, the Company completed the sale of 100% of its interest in its wholly-owned subsidiary SM&P Utility Resources, Inc. (SM&P) to Stripe Acquisition, Inc. (an affiliate of Kohlberg Management VI, LLC) for $85 million in cash, subject to certain closing and post-closing adjustments. SM&P was an underground facilities locating and marking business that formerly comprised Laclede Group's Non-Regulated Services operating segment. The sales agreement included representations, warranties, and indemnification provisions customary for such transactions and was filed as an exhibit to the March 31, 2008 Form 10-Q. In accordance with generally accepted accounting principles, the results of operations for SM&P are reported as discontinued operations in the Statements of Consolidated Income.

Laclede Energy Resources, Inc. (LER) is engaged in the marketing of natural gas and related activities on a non-regulated basis. LER markets natural gas to both on-system Utility transportation customers and customers outside of Laclede Gas' traditional service territory, including large retail and wholesale customers. LER's operations and customer base are more subject to fluctuations in market conditions than the Utility.

Other subsidiaries provide less than 10% of consolidated revenues.

Based on the nature of the business of the Company and its subsidiaries, as well as current economic conditions, management focuses on the following key variables in evaluating the financial condition and results of operations and managing the business:

Regulated Gas Distribution Segment:

• the Utility's ability to recover the costs of distribution of natural gas to its customers;
• the impact of weather and other factors, such as customer conservation, on revenues and expenses;
• changes in the regulatory environment at the federal, state, and local levels, as well as decisions by regulators, that impact the Utility's ability to earn its authorized rate of return;
• the Utility's ability to access credit markets and maintain working capital sufficient to meet operating requirements; and,
• the effect of natural gas price volatility on the business.

Non-Regulated Gas Marketing Segment:

• the risks of competition;
• regional fluctuations in natural gas prices;
• new national pipeline infrastructure projects;
• credit and/or capital market access;
• counterparty risks; and,
• the effect of natural gas price volatility on the business.

Further information regarding how management seeks to manage these key variables is discussed below.

Laclede Group's strategy continues to include efforts to improve the performance of its core Utility, while developing non-regulated businesses and taking a measured approach in the pursuit of additional growth opportunities that complement the Utility business.

As for the Utility, improving performance and mitigating the impact of weather fluctuations on Laclede Gas' customers while improving the ability to recover its authorized distribution costs and return continue to be a fundamental component of Laclede Group's strategy. The Utility's distribution costs are the essential, primarily fixed expenditures it must incur to operate and maintain more than 16,000 miles of mains and services comprising its natural gas distribution system and related storage facilities. The Utility's distribution costs include wages and employee benefit costs, depreciation and maintenance expenses, and other regulated utility operating expenses, excluding natural and propane gas expense. Distribution costs are considered in the ratemaking process and recovery of these types of costs is included in revenues generated through the Utility's tariff rates, as approved by the MoPSC. As previously reported, Laclede Gas has undertaken an evaluation of the Utility's natural gas storage field, which was developed more than 50 years ago, to assess the field's current and future capabilities. While not yet complete, the assessment has provided information that should result in improved efficiencies in managing the operation of the field. Based on this initial assessment, inventory balances included in the Consolidated Balance Sheet as of September 30, 2009 have been reclassified consistent with the results of the evaluation and management's expectations regarding the future operation of the storage field. In addition, Laclede Gas is working continually to improve its ability to provide reliable natural gas service at a reasonable cost, while maintaining and building a secure and dependable infrastructure. The settlement of the Utility's 2007 rate case resulted in enhancements to the Utility's weather mitigation rate design that better ensure the recovery of its fixed costs and margins despite variations in sales volumes due to the impacts of weather and other factors that affect customer usage.

The Utility's income from off-system sales and capacity release remains subject to fluctuations in market conditions. Effective October 1, 2007, the Utility is allowed to retain 15% to 25% of the first $6 million in annual income earned (depending on the level of income earned) and 30% of income exceeding $6 million annually. Some of the factors impacting the level of off-system sales include the availability and cost of the Utility's natural gas supply, the weather in its service area, and the weather in other markets. When Laclede Gas' service area experiences warmer-than-normal weather while other markets experience colder weather or supply constraints, some of the Utility's natural gas supply is available for off-system sales and there may be a demand for such supply in other markets. See the Regulatory Matters section on page 31 of this report for additional information on regulatory issues relative to the Utility.

While the price of natural gas has moderated recently, Laclede Gas continues to work actively to reduce the impact of wholesale natural gas prices on its costs by strategically structuring its natural gas supply portfolio to increase its gas supply availability and pricing alternatives and through the use of derivative instruments to protect its customers from significant changes in the commodity price of natural gas. Nevertheless, the overall cost of purchased gas remains subject to fluctuations in market conditions. The Utility's Purchased Gas Adjustment (PGA) Clause allows Laclede Gas to flow through to customers, subject to prudence review, the cost of purchased gas supplies, including costs, cost reductions, and related carrying costs associated with the use of derivative instruments to hedge the purchase price of natural gas, as well as gas inventory carrying costs. The Utility believes it will continue to be able to obtain sufficient gas supply. The price of natural gas supplies and other economic conditions may affect sales volumes, due to the conservation efforts of customers, and cash flows associated with the timing of collection of gas costs and related accounts receivable from customers. Long-term increases in the wholesale cost of natural gas supplies may adversely impact the Utility's competitive position compared with alternative energy sources.

The Utility relies on both short-term credit and long-term capital markets, as well as cash flows from operations, to satisfy its seasonal cash requirements and fund its cost of capital expenditures. Laclede Gas' ability to issue commercial paper supported by lines of credit, to issue long-term bonds, or to obtain new lines of credit is dependent on current conditions in the credit and capital markets. Management continues to focus on maintaining a strong balance sheet and believes it currently has adequate access to credit and capital markets and will have sufficient capital resources to meet its foreseeable obligations. See the Liquidity and Capital Resources section on page 33 for additional information.

LER continues to focus on growing its markets on a long-term and sustainable basis by providing both on-system Utility transportation customers and customers outside of Laclede Gas' traditional service area with another choice in non-regulated natural gas suppliers. LER is working to assemble the team, technology, and resources necessary to expand its geographic service area and the range of services that it now provides. Nevertheless, income from LER's operations is more subject to fluctuations in market conditions than the Utility's operations. LER's business is directly impacted by the effects of competition in the marketplace and the impact of new pipeline infrastructure on regional commodity prices of natural gas.

In addition to its operating cash flows, LER relies on parental guarantees to secure its purchase and sales obligations of natural gas. A large portion of LER's receivables are from customers in the energy industry. In addition, LER may enter into netting arrangements with its energy counterparties to reduce overall credit and collateral exposure. Although LER's uncollectible amounts are closely monitored and have not been significant, increases in uncollectible amounts from customers are possible and could adversely affect LER's liquidity and results.

LER carefully monitors the creditworthiness of counterparties to its transactions. LER performs in-house credit reviews of potential customers and requires prepayments or letters of credit from non-investment grade customers. Credit limits for customers are established and monitored.

EARNINGS

Overview - Net Income (Loss) by Operating Segment

(Millions, After-tax )
Years Ended September 30                 2009         2008         2007
Regulated Gas Distribution              $ 33.2       $ 39.1       $ 32.1
Non-Regulated Gas Marketing               31.4         19.3         13.3
Other                                     (0.4 )       (0.9 )        0.4
Income from Continuing Operations         64.2         57.5         45.8
Income from Discontinued Operations          -         20.4          4.0
Net Income                              $ 64.2       $ 77.9       $ 49.8

Laclede Group's consolidated net income was $64.2 million in fiscal year 2009, compared with $77.9 million in fiscal year 2008, and $49.8 million in fiscal year 2007. Net income decreased $13.7 million, or 17.6%, in fiscal year 2009 (compared with fiscal year 2008) primarily due to the net effect of the one-time gain on the March 31, 2008 sale and operations of SM&P, partially offset by increased income from continuing operations. Net income increased $28.1 million, or 56.4%, in fiscal year 2008 (compared with fiscal year 2007) primarily due to the fiscal year 2008 gain on the sale of SM&P and increased income from continuing operations.

Basic and diluted earnings per share were $2.93 and $2.92, respectively, for fiscal year 2009 compared with basic and diluted earnings per share of $3.60 and $3.58, respectively, for fiscal year 2008, and $2.32 and $2.31, respectively for fiscal year 2007. The year-to-year variations in earnings per share were primarily due to the changes in net income in each period.

Income from Continuing Operations

Laclede Group's income from continuing operations was $64.2 million in fiscal year 2009, compared with $57.5 million in fiscal year 2008, and $45.8 million in fiscal year 2007. Income from continuing operations increased $6.7 million, or 11.7%, in fiscal year 2009 (compared with fiscal year 2008) primarily due to improved results reported by Laclede Group's Non-Regulated Gas Marketing segment, partially offset by lower earnings reported by Laclede Group's Regulated Gas Distribution segment. Income from continuing operations increased $11.7 million in fiscal year 2008 (compared with fiscal year 2007) primarily due to improved results reported by both Laclede Group's Regulated Gas Distribution segment and its Non-Regulated Gas Marketing segment.

Basic and diluted earnings per share from continuing operations were $2.93 and $2.92, respectively, for fiscal year 2009, compared with basic and diluted earnings per share of $2.66 and $2.64, respectively, for fiscal year 2008, and $2.13 and $2.12, respectively, for fiscal year 2007. Variations in income from continuing operations were primarily attributable to the factors described below.

2009 vs. 2008

Regulated Gas Distribution net income decreased by $5.9 million in 2009, compared with 2008. The decrease in net income was primarily due to the following factors (quantified on a pre-tax basis, except for the income tax item):

• increases in operation and maintenance expenses, excluding the provision for uncollectible accounts, totaling $4.9 million;
• the effect of lower system gas sales volumes and other variations totaling $2.0 million;
• the effect of the recognition of previously unrecognized tax benefits and the reversal of related expenses recorded during fiscal year 2008, totaling $1.6 million; and,
• an increase in depreciation and amortization expense totaling $1.4 million.

These factors were partially offset by higher Infrastructure System Replacement Surcharge (ISRS) revenues totaling $3.8 million.

The Non-Regulated Gas Marketing segment reported earnings totaling $31.4 million for fiscal year 2009, an increase in earnings of $12.1 million compared with fiscal year 2008. The increased earnings were primarily due to LER's increased sales volumes primarily attributable to its acquisition of additional firm pipeline transportation capacity prior to the 2008 - 2009 winter. This capacity, along with favorable natural gas costs, supported 49% higher sales volumes and greater margins in fiscal year 2009 as compared with fiscal year 2008. These factors were partially offset by the effect of a benefit from the reversal of certain tax-related expenses totaling $1.3 million during fiscal year 2008.

2008 vs. 2007

Regulated Gas Distribution net income increased by $7.0 million in 2008, compared with 2007. The increase in net income was primarily due to the following factors (quantified on a pre-tax basis, except for the income tax item):

• the benefit of the general rate increase, effective August 1, 2007, totaling $32.9 million;
• the recognition of previously unrecognized tax benefits and the reversal of related expenses, totaling $1.6 million; and,
• the effect of higher system gas sales volumes and other variations totaling $1.1 million.

These factors were partially offset by:

• lower income from off-system sales and capacity release, totaling $10.2 million, primarily due to a reduction in the Utility's share of such income (pursuant to the 2007 rate case);
• increases in operation and maintenance expenses, excluding the provision for uncollectible accounts, totaling $8.3 million; and,
• an increase in the provision for uncollectible accounts, totaling $6.0 million.

The Non-Regulated Gas Marketing segment reported earnings totaling $19.3 million for fiscal year 2008, an increase in earnings of $6.0 million compared with fiscal year 2007. The increased earnings were primarily due to improved margins on sales of natural gas by LER, 15% higher sales volumes, and the effect of a reversal of tax-related expenses during fiscal year 2008.

Regulated Gas Distribution Operating Revenues

2009 vs. 2008

Laclede Gas passes on to Utility customers (subject to prudence review) increases and decreases in the wholesale cost of natural gas in accordance with its PGA Clause. The volatility of the wholesale natural gas market results in fluctuations from period to period in the recorded levels of, among other items, revenues and natural gas cost expense. Nevertheless, increases and decreases in the cost of gas associated with system gas sales volumes have no direct effect on net revenues and net income.

Regulated Gas Distribution Operating Revenues for fiscal year 2009 decreased $74.3 million compared to fiscal year 2008. Temperatures experienced in the Utility's service area during 2009 were 1.8% warmer than the same period last year and 1.5% warmer than normal. Total system therms sold and transported were 0.91 billion for fiscal year 2009 compared with 0.93 billion for fiscal year 2008. Total off-system therms sold and transported were 0.16 billion for fiscal year 2009 compared with 0.14 billion for fiscal year 2008. The decrease in Regulated Gas Distribution Operating Revenues was primarily attributable to the following factors:

(Millions)
Lower prices charged for off-system sales                  $ (64.2 )
Lower wholesale gas costs passed on to Utility customers
(subject to prudence review by the MoPSC)                    (19.0 )
Higher off-system sales volumes (reflecting more
favorable market conditions as described in greater
 detail in the Results of Operations)                         16.6
Lower system sales volumes and other variations              (11.5 )
Higher ISRS revenues                                           3.8
   Total Variation                                         $ (74.3 )

2008 vs. 2007

Regulated Gas Distribution Operating Revenues for fiscal year 2008 decreased $3.3 million compared to fiscal year 2007. Temperatures experienced in the Utility's service area during 2008 were 6.8% colder than fiscal year 2007, but 1.1% warmer than normal. Total system therms sold and transported were 0.93 billion for fiscal year 2008 compared with 0.91 billion for fiscal year 2007. Total off-system therms sold and transported were 0.14 billion for fiscal year 2008 compared with 0.21 billion for fiscal year 2007. The decrease in Regulated Gas Distribution Operating Revenues was primarily attributable to the following factors:

(Millions)
Lower off-system sales volumes                             $ (47.9 )
Lower wholesale gas costs passed on to Utility customers
(subject to prudence review by the MoPSC)                    (38.2 )
General rate increase, effective August 1, 2007               32.9
Higher system sales volumes, primarily due to colder
weather and other variations                                  27.3
Higher prices charged for off-system sales                    24.0
Lower ISRS revenues                                           (1.4 )
   Total Variation                                         $  (3.3 )

Regulated Gas Distribution Operating Expenses

2009 vs. 2008

Regulated Gas Distribution Operating Expenses in fiscal year 2009 decreased $65.1 million, or 6.2%, from fiscal year 2008. Natural and propane gas expense decreased $70.1 million from last year's level, primarily attributable to lower off-system gas expense, decreased rates charged by our suppliers, and lower volumes purchased for sendout. Other operation and maintenance expenses increased $3.9 million, or 2.3%, primarily due to increases in compensation expenses, higher maintenance charges, and increased injuries and damages expense, partially offset by a decrease in distribution charges, a lower provision for uncollectible accounts, and a gain on the disposal of assets in fiscal year 2009. Depreciation and amortization expense increased $1.4 million, or 4.1%, primarily due to additional depreciable property.

2008 vs. 2007

Regulated Gas Distribution Operating Expenses in fiscal year 2008 decreased $11.6 million, or 1.1%, from fiscal year 2007. Natural and propane gas expense decreased $27.8 million from fiscal year 2007, primarily attributable to lower rates charged by our suppliers and lower off-system gas expense, partially offset by higher system volumes purchased for sendout. Other operation and maintenance expenses increased $14.3 million, or 9.2%, primarily due to a higher provision for uncollectible accounts, increased maintenance and distribution expenses, increased wage rates, higher legal fees, increased pension costs, and the effect of a gain on the disposal of assets recorded during fiscal year 2007. Depreciation and amortization expense increased $1.2 million, or 3.6%, primarily due to additional depreciable property.

Non-Regulated Gas Marketing Operating Revenues and Operating Expenses

Non-Regulated Gas Marketing Operating Revenues decreased $239.0 million in fiscal year 2009 from those revenues for fiscal year 2008 primarily due to lower per unit gas sales prices charged by LER, partially offset by higher sales volumes. The decrease in Non-Regulated Gas Marketing Operating Expenses of $261.1 million was primarily associated with lower prices charged by suppliers, partially offset by increased volumes purchased.

Non-Regulated Gas Marketing Operating Revenues increased $357.1 million in fiscal year 2008 from those revenues for fiscal year 2007 primarily due to higher per unit gas sales prices charged by LER and increased sales volumes. The increase in Non-Regulated Gas Marketing Operating Expenses of $349.2 million was primarily associated with higher prices charged by suppliers and increased volumes purchased.

Other Income and (Income Deductions)-Net

Other Income and (Income Deductions)-Net decreased $0.4 million in fiscal year 2009 (compared to fiscal year 2008), due to lower interest income and the effect of a benefit recognized during fiscal year 2008 from the reversal of certain tax-related expenses. These factors were largely offset by the effect of a loss on the redemption of long-term debt (primarily unamortized issuance costs) recognized during fiscal year 2008 and increased income associated with carrying costs applied to under-recoveries of gas costs. Carrying costs on under-recoveries of gas costs are recovered through the Utility's PGA Clause.

Other Income and (Income Deductions)-Net decreased $4.9 million in fiscal year 2008 (compared to fiscal year 2007), due to higher net investment losses, a loss on the redemption of long-term debt (primarily unamortized issuance costs), lower income associated with carrying costs applied to under-recoveries of gas costs, and increased charitable donations. These factors were partially offset by a reversal of tax-related expenses and additional proceeds related to the Company's interest, as a policyholder, in the sale of a mutual insurance company.

Interest Charges

The $0.3 million increase in interest charges in fiscal year 2009 (over fiscal year 2008) was primarily due to higher interest on long-term debt, primarily attributable to the issuance of $80.0 million principal amount of 6.35% First Mortgage Bonds on September 23, 2008. This increase was largely offset by lower interest on short-term debt. The $4.5 million decrease in interest charges in fiscal year 2008 (over fiscal year 2007) was primarily due to a reduction in interest on long-term debt resulting from the November 2007 maturity of $40 million principal amount of 7 1/2% First Mortgage Bonds, lower interest on short-term debt, and the reversal of tax-related expenses. Average short-term interest rates were 1.5% this year compared with 4.1% in fiscal year 2008 and 5.4% in fiscal year 2007. Average short-term borrowings were $207.6 million, $180.7 million, and $156.2 million for fiscal years 2009, 2008, and 2007, respectively.

Income Taxes

Income tax expense increased $6.3 million in fiscal year 2009 (over fiscal year 2008) and $4.0 million in fiscal year 2008 (over fiscal year 2007). These increases are primarily due to higher pre-tax income. The year-to-year variations also reflect the effect of lower income tax expense in fiscal year 2008 due to the recognition of previously unrecognized tax benefits.

Income from Discontinued Operations

The sale of SM&P on March 31, 2008 resulted in after-tax earnings of $25.4 million, net of associated costs of disposal. Income from Discontinued Operations for fiscal year 2008 was $20.4 million, consisting of the net effect of the sale and SM&P's seasonal operating loss through the March 31 sale date. Income from Discontinued Operations for fiscal year 2007 was $4.0 million reflecting SM&P's operating income for the period.

Basic and diluted earnings per share from discontinued operations were $0.94 for fiscal year 2008 and $0.19 for fiscal year 2007.

Labor Agreement

Laclede Gas has labor agreements with Locals 11-6 and 11-194 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union, which represent approximately 64% of Laclede Gas' employees. The agreements expire at midnight on July 31, 2012.

The Missouri Natural Division of Laclede Gas has labor agreements with Local 884 of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied-Industrial and Service Workers International Union, which represents approximately 5% of Laclede Gas' employees. On April 15, 2009, new four-year labor agreements were reached replacing the prior agreements which expired on that same date. The new agreements, which expire at midnight on April 14, 2013, include revisions to the defined benefit pension plan formula, changes in wage rates and work rules, and other modifications that enable the Utility to provide high quality service to its customers and control operating costs while continuing to provide competitive wages, pension, and healthcare benefits to its employees.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition, results of operations, liquidity, and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Generally accepted accounting principles (GAAP) require that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the more significant items requiring the use of judgment and estimates in preparing our consolidated financial statements: . . .